Fitch adding climate scores to credit ratings

With companies’ climate risk mitigation efforts expected to play a larger role in credit risk, Fitch Ratings launched a consultation on its planned use of climate risk scores in its ratings.

The rating agency published a discussion paper that outlined its plans for incorporating “climate vulnerability scores” into the ratings process.

To date, the rating consideration of these risks has been limited to specific sectors, particularly the utilities sector, but Fitch said it expects the “pace and breadth of climate change policies” to accelerate in the years ahead.

As a result, it’s planing to start using its existing sector-level climate scores as a screening tool “to identify entities that are potentially more vulnerable to climate-related risks,” it said.

Companies that are flagged as potentially facing higher climate risks will then be subjected to added scrutiny by Fitch’s credit rating committees.

“Scores assigned to entities, and the results of this additional analysis where performed, will be disclosed in our entity-specific rating reports,” it said, noting that it will implement this screening and added disclosure on a trial basis as it determines whether to proceed with its proposed approach.

These climate risk scores focus on transition risks, rather than physical risks, Fitch said, “as we believe climate-related policy, market and regulatory risks are likely to have a more severe credit impact on corporates as a whole in the first half of this century than the physical risks from climate change itself.”

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